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Monday, 22 December 2014

Bahrain Sukuk Mauled as Oil Drop Imperils Plans

The Gulf nation’s dollar-denominated sukuk that mature in 2018 have dropped 1.3 percent since the end of September, compared with an average 0.8 percent gain for more than 30 Islamic sovereign dollar bonds tracked by Bloomberg. Only the five-year $1 billion sukuk issued by Pakistan, where Islamic militants have killed more than 50,000 people since 2001, have performed worse.

The decline underscores how oil’s 45 percent slide since last year is hurting a country whereStandard & Poor’s estimates crude accounts for 65 percent of fiscal revenue and yet has oil reserves that are less than 0.1 percent of neighboring Saudi Arabia. The retreat threatens to jeopardize some of the $30 billion of infrastructure projects the government is planning to sustain economic growth and becalm protests by the majority Shiite population, according to Commerzbank AG.

“Bahrain is a bit more sensitive because they don’t have a lot in reserves as Saudi or others to keep supporting their projects,” Apostolos Bantis, a credit analyst at Commerzbank in Dubai, said by phone on Dec. 17. “They will have to cut costs and stop some of the projects they’re working on. There is a risk of political unrest.”

Low oil prices will “exacerbate” existing structural weaknesses in Bahrain’s public finances and may lead to a 10 percent decline in government revenue next year, S&P said in a Dec. 12 report, revising the country’s debt outlook to negative from stable.

PROTEST DEATHS

Brent crude, the benchmark grade for more than half the world’s oil, sank to $59.27 a barrel last week, the lowest since May 2009. Bahrain requires an average oil price of about $120 a barrel to balance its budget, according to S&P.

Home to the U.S. Navy’s fifth fleet and the smallest crude oil producer in the Gulf, Bahrain witnessed some of the worst popular unrest in the region amid turmoil triggered by revolutions in Tunisia and Egypt.

Shiites, who make up a majority of the nation’s 1.3 million people, were demanding rights equal to those of Sunnis, including appointments to senior government and military posts. That spurred a string of projects and social expenditure from the government to help avoid further discord.

“The kingdom is set to invest up to $30 billion in key infrastructure projects over the coming years, across a range of sectors including transport, housing, manufacturing, energy, healthcare and education,” Jarmo Kotilaine, the chief economist at the Manama-based Bahrain Economic Development Board, said by e-mail yesterday, projecting growth of more than 4 percent in 2014. “Mounting infrastructure spending is an important driver while even the oil sector has surprised on the upside.”

STRUCTURAL WEAKNESS

As part of its development plan, Bahrain is spending $743 million for three power plants, $82 million on a 120-bed oncology center and the construction of more than 4,000 residential homes.

The yield on Bahrain’s 2018 Islamic notes jumped 54 basis points to 2.7 percent in the quarter through Dec. 19, compared with an 17 basis-point increase to 4.4 percent for Middle East sukuk on average, according to JPMorgan Chase & Co. indexes.

Bahrain and Oman will be the countries in the Gulf Cooperation Council most susceptible to lower oil prices in its report this month, according to Moody’s Investors Service. Bahrain has reserve assets of about $5.4 billion, including gold and foreign currencies, compared with $745 billion for Saudi Arabia, government data show. Bahrain’s deficit may widen to more than 7 percent of gross domestic product next year, Moody’s said.

“Running a deficit for one year is not a big deal and manageable,” Bantis said. “But if they keep running deficits then they will be in big trouble.